Industrial and Commercial Market Commentary - 2020
The general industrial and commercial property market has been extremely strong over the past four years particularly in 2017 and 2019. During 2015/2016 yields started to compress due to increased demand attributed to the low interest rate economy. More recently 2017 – 2019 have seen yields compress even further. Coming into 2020 the market is still firm but with yields now stabilising. Generally over all property cycles good quality properties which form solid investments with good quality tenant and lease covenants, located in good locations have always been in relatively strong demand, however during these more aggressive buoyant times, second tier properties have also sold readily with investors being less discretionary particularly in regard to lease covenant and market rental levels.
The market immediately following the Global Financial Crisis was predominantly characterised by purchasers for owner occupation taking advantage of the then low interest rate economy. Owner occupiers pay less attention to market derived returns but focus on price in relation to construction costs and more importantly debt servicing. During that period investors were less willing to accept the lower derived yields, however in 2016-2019 investors sentiment changed with investors re-entering the market at the lower yield levels.
Overall the market may be best described as overheated with excessive demand and very limited supply of commercial real estate where analysed yields are not really attracting a significant premium over and above the cost of borrowing or opportunity cost interest rates. The market has been fuelled by debt and therefore with a potential to see a significant retraction in the short to medium term should interest rates increase. What is significant is due to the compressed yields, although investors are prepared to accept a lower return as the cost of borrowing has reduced due to the lower interest rate economy, the timeframe for repayment of the asset is significantly increased. This is significant as an investor may not have sufficient equity to ride out the additional property cycles low periods.
The overall average of the initial yield for all commercial property sales analysed at Property Solutions occurring in Tauranga were as follows: